Another Good Year?

With the New Year’s Day quarrels over the “fiscal cliff” only briefly behind us, the renewed debates on the debt ceiling lie just ahead. The ship of state dodged this iceberg in August of 2011 when partisan deadlock brought the federal government to the brink of a totally needless default on its obligations. As Congress is essentially dealing with paying for expenditures that it has already approved, this “debate” is irresponsible political playacting.

Like most governments, it is normal for the US to carry debt and has been since it assumed debts incurred during its Revolution. In 1917, to finance another war, the Congress created the “debt ceiling” to enable selling “Liberty Bonds.” As a procedural formality it was routinely raised, including 74 times since 1962. It has nothing to do with the actual deficit, whose enlarged levels today are the result of overseas wars, tax cuts and, most recently, from reduced revenues following the financial crisis.

A continuing economic recovery is essential to boosting revenues; it could be endangered by partisan wrangling forcing crude fiscal constraints. As H.L Menken said, “There is always an easy solution to every human problem – neat, plausible and wrong. The immediate danger to the economy and the stock market is not the levels of indebtedness but shortsighted legislators that make things worse.

I wrote in December that it seemed probable that the outgoing Congress would put together a stopgap measure addressing taxes, deferring spending cuts to its successors. That is exactly what happened and stocks had a nice rally as that crisis passed without too much damage. The forthcoming fights over the debt ceiling and with spending cuts involve more complex issues and the process will be messy. It will pass, hopefully soon and without halting our economic recovery.

By then, earnings reports for the December quarter will be in, together with company guidance for 2013. After some negative surprises in the September quarter, analysts trimmed their projections for the December quarter. This provides room for some positive surprises that may support stocks until the debt ceiling begins to hog the headlines.

Any softening of the economic growth rate would probably be felt first in stocks of cyclical sectors like heavy industry. Technology stocks usually hold up provided they can continue strong earnings growth. I am adding Taiwan Semiconductor (TSM-$18) as a new buy. It makes integrated circuits for use in many sectors. Sales are $16 billion and accelerating as the global recovery takes hold. Analysts are ratcheting earnings estimates up to a 35% gain for the December quarter, which should add to its current price momentum.

As expected, Abbott Labs (ABT-$33) spun off its newly hatched pharmaceutical subsidiary, AbbVie, which I sold. Abbott is a stable, diversified company and I am retaining its stock.

The stocks mentioned earlier are all good candidates for reinvesting new funds, particularly Amgen. Founded in 1980, this well-known biotech is steadily growing with over $16 billion in sales. Once operating with essentially only two major drugs, it now addresses a broad spectrum of illnesses. Its forthcoming earnings release should show growth above 20%, probably adding to its stock price action.

Interest rates continue to be at near record lows, usually a favorable catalyst for stocks. Many of the worries confronting investors now were present in 2012, yet the S&P 500 stock index was up 13%. The odds favor another good year.